Currency Watch: 2012 here we come…

So we are now moving quickly towards that time of year that every honest economist dreads, it’s time to predict the future by looking ahead to 2012 and speculating as to what may be in store.

Some of my peers love this opportunity to look into their crystal ball and cast their eye forward to the year ahead.

However, some of us don’t like the Mystic Meg season all that much, especially because it gives us economists ample opportunity to be made to look like fools when unpredictable world events take us off in a completely unexpected direction.

I was always told that the best way to predict the future was to invent it, but to save me from applying for the soon-to-be-vacant governorship of the Bank of England, I’ll leave the economic tinkering and policy decisions for someone else (for now at least – I still plan to become Chancellor of the Exchequer by the time I’m 45).

Predictions in calm markets are pretty useless, let alone in the kind of markets that we are seeing at the moment. Nevertheless, it is now time for us economists to prostrate ourselves and have people throw rotten fruit and the occasional curse word at us as we proceed to predict what the next 12 months might have in store for us.

Quick caveat, all my assertions are made on the assumption that the Eurozone does not fall apart. If it does then all bets are off and you better get used to eating rocks for dinner. So here’s a couple for you…

The UK economy will not enter a double dip recession

The UK economy, as is the same in most developed nations, is struggling along at the moment with little optimism in the short term.

We expect that the two toughest quarters for the economy will be Q4 this year and Q1 2012 as consumer spending slows, business investment remains weak and government spending cuts continue. I expect growth will be slight in Q4 (0.1%) and a fall in Q1 by around 0.2%.

The slow grind higher will restart as we head towards the summer.

Forgive me for coming across as overly negative, but everyone must realise that the next couple of years regardless of whether you live in Kensington, Kettering or Keswick are going to be tough. You don’t get over 10 years of excess without a significant hangover.

EU leaders will sort themselves out in 2012

I’m not a natural optimist (a penchant for acoustic music and whiskey will do that to a man), but I think that the great and the good of the European political system will come to their senses in 2012 and a lasting resolution to the continent’s debt problems will emerge.

This will come from a new “fiscal compact” – a centralised government and the eventual transition to a United States of Europe.

They will not do this as a result of anything other than another brush with the apocalypse.

I’m not sure what the trigger will be (bad business confidence numbers from the Germans, France’s credit rating being cut, social unrest in Italy or the fall of another government) but something large will happen that will eventually shake the political class from this malaise.